Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

The UK Government has announced several new changes that it intends to introduce for Debt Relief Orders (DROs), that apply only in England, Wales, and Northern Ireland.

These solutions are like Scotland’s Minimum Asset Bankruptcy Procedure (MAPs) and offer consumers with little income, and little to no assets, a solution for dealing with their debts and writing them off after a relatively short period of time. 

However, there are several key differences between the solutions and these differences will soon become more pronounced when changes proposed by the UK Government to Debt Relief Orders come into effect.

The Question is, then, is there more the Scottish Government should be doing to improve the Minimum Asset Procedure in Scotland?

Already, because of Covid 19, they have introduced emergency laws last year, that have now become permanent, and have improved the Scottish option in many areas, but still in one key respect, the level of income ignored, the Scottish solution still lags.

Maximum Debt LevelIncome IgnoredAsset LevelsCar ExemptionDuration Application Fee
MAP£25,000 (2)£0.00£2,000 (3)£3,0006 Months£50 (4)
DRO(1)£30,000£75£2,000£2,00012 Months£90

Notes

  1. Proposed changes
  2. In Scotland, Student Loans are ignored when calculating the maximum debt level
  3. No single asset can be worth more than £1,000
  4. Application fees are waived when someone is in receipt of a benefit. The vast majority of MAP applicants will pay no application fee in Scotland

Maximum Debt Levels

Both options are similar in the maximum level of debt you can introduce, however, the new proposed changes to DROs in the UK will mean up to £30,000 in debt can be included, whereas the maximum debt that can be included in Scotland is only £25,000.

However, in Scotland, where you have Student Loans, which liability for is not discharged in either solution, these are ignored when calculating the maximum debt levels. This for some will mean a MAP is a viable option in Scotland, when they have higher non-student loan debts, than it will in the rest of the UK, even when their non-student loan debts are lower.

However, this will not help those in Scotland without student loan debt, who may find if they lived in England could do a DRO, but in Scotland cannot. This, however, won’t prevent them using a Full Administration Bankruptcy in Scotland, which may only last12 months, like a DRO in the rest of the UK.

Income Ignored

This is one of the biggest differences between the two options, with DROs ignoring the first £75 of someone’s disposable income (what is left after their essential expenditure is taken off their income). In Scotland, no such provision is made, meaning if you have just £5 left each month from income that a contribution can be taken from, you cannot use the Minimum Asset Procedure.

It should be noted, however, that no contribution in either solution can be taken from benefits, so the only income that a contribution can be taken from is non-benefit income.

This undoubtedly is a shortcoming in the Scottish Solution, as what it means is in England, Wales, and Northern Ireland, where you have under £75 per month, you can keep it. In Scotland, not only can you not keep it, but you cannot use the Minimum Asset Procedure. You would then have to use the Full Administration Procedure (the equivalent to Bankruptcy in the rest of the UK) and unlike in England, Wales, and Northern Ireland, you would need to pay the money for four years and not just three.

Assets Levels

Although in relation to both solutions these look the same, with the maximum assets you can own being anything up to £2,000, in Scotland, there is one key difference in that no one asset can be worth more than £1,000.

However, in Scotland’s defence the extent of assets that are disregarded for the purpose of MAPs are more extensive (see here).

Car Exemptions

Scotland since 2010, has set the value of a car that is exempt for the purposes of a MAP and Bankruptcy at £3,000 (although it has not increased since then), whereas in the UK the value of car exempt for a DRO will only be set at £2,000.

The only other caveat in Scotland worthy of note, is the applicant must show they have a reasonable requirement for the car.

Duration

This is the other big difference between the solutions, in that in a MAP in Scotland, the solution only last 6 months, and after that the consumer becomes debt free. In the rest of the UK, the solution lasts 12 months.

Although it should be noted, in Scotland, even if you have £5 disposable income per month, you will not be able to use the Process and instead will have to use Full Administration Bankruptcy and pay for 4 years.

Fees

The other big difference now, since Covid 19 emergency legislation was introduced, is the amount it costs someone to apply for the procedure. In the rest of the UK, the fee is £90 (as it was for Minimum Asset Bankruptcy prior to Covid 19). In Scotland, however, that fee has now reduced to £50 and where the applicant is in receipt of several different benefits, the fee is waived. This means almost no-one in Scotland will pay an application fee, whereas in the rest of the UK, even after the new changes are introduced, the fee will remain £90.

Conclusion

There are several differences between both solutions, as can be seen, but on the face of it where the Scottish solution lags, when considered more widely, it is not as far behind Debt Relief Orders as it may appear. In actual fact, in many respects, MAPs appear superior.

However, it does appear the big difference in relation to both is the difference in how disposable income is treated, with many consumers having to use Full Administration Bankruptcy in Scotland for relatively small sums of disposable income.

Considering this may result in them having to pay for four years, this appears to be disproportionate; and from a policy perspective may be counterproductive. It may result in low-income households giving up relatively small additional sources of income, like part time jobs, just to avoid being excluded from the Minimum Asset Procedure.

The arguments in favour of Scotland, therefore using a similar approach to the rest of the UK and disregarding the first £75 of disposable income, appears overwhelming

Bankruptcy Fees Regulations revoked by Minister

Bankruptcy Fees Regulations revoked by Minister

Paul Wheelhouse, the Scottish Government Minister for Business, Innovation and Energy, has written to the Economy, Jobs and Fair Work Committee to state he will revoke the Bankruptcy Fees (Scotland) Regulations 2017.

Govan Law Centre and the Institute of Chartered Accountants of Scotland (ICAS) had opposed the fee increases, which increased the AIB fees for selling a debtor’s home by 188% in some cases.

In his letter to the Chairman of the Committee, Gordon Lindhurst, Minister Wheelhouse wrote:

In light of the issues raised, and my desire to ensure that we are able to best address the points raised by the Committee, I can confirm that the proposed regulations will be revoked and an appropriate revocation instrument will be laid in the Parliament today.

I particularly want to ensure that the Committee has comfort that any revised measures benefit from engagement with our key stakeholders. Therefore I propose that AiB will consult on our behalf on revised proposals, taking into account constructive points raised by the Committee in the evidence session, and your letter, before we bring forward a new set of regulations to the Committee, in due course, with a view to seeking the Committee’s support.

The Minister’s letter can be read here.

Bankruptcy fees: Scottish Parliament takes evidence

Bankruptcy fees: Scottish Parliament takes evidence

Evidence was taken on the Bankruptcy Fees (Scotland) Regulations 2017 by the Scottish Parliament’s Economy, Jobs and Fair Work Committee on Tuesday the 21st March 2017.

Evidence was provided by Mike Dailly and Alan McIntosh of Govan Law Centre and David Menzies of the Institute of Chartered Accountants of Scotland.

The Fees proposed a number of changes to regulations that govern bankruptcy fees in Scotland, namely to increase the fees the Accountant in Bankruptcy (AIB) could charge when selling the home of debtors. In some cases, these fees would increase by up to 188%. Other fee amendments related to the Accountant in Bankruptcy audit fees in sequestrations and also included introducing interest at 8% for late payment of fees to the AIB by Insolvency Practitioners.

The second part of the evidence session involved evidence being delivered by the Minister, Paul Wheelhouse and the Accountant in Bankruptcy, Dr Richard Dennis.

Bankrupt Home Owners to lose out because of Fees

Bankrupt Home Owners to lose out because of Fees

Bankrupt home owners in Scotland, from the 3rd of April 2017, will pay substantially more when their home is sold by the Accountant in Bankruptcy (AIB) in a sequestration.

The massive fee hikes, being proposed by the Bankruptcy Fees (Scotland) Regulations 2017, will see the AIB increase their fees, when selling a debtors home, by as much as 188%.  What this means is where a debtor’s home is sold, more of the money realised from the sale will now go to the AIB, a government quango, and less will go to creditors or be returned to the debtor after creditors have been paid.

What makes these increases the more shocking, is they come 2 years after the Scottish Government changed the law to make Scottish debtors pay for longer: on the pretext it was necessary to increase returns to creditors.

However, the AIB’s concerns for increasing dividends appears to have subsided with the new proposed fee increase, where the Scottish Government quango will max out its potential revenue from the sale of family homes.

As the table below shows, under the old rules, the AIB took significantly less to what is now being proposed under the new regulations, with the increase being as much as 188%, where there is £50,000 equity in a home.

AIB Costs and Full Cost Recovery

There is a growing concern what lies at the heart of these fee increases, and indeed the Scottish Governments decision that debtors should pay for longer, is the need to fund the Accountant in Bankruptcy, an organisation whose entire business model appears to be to increase fees when revenue drops from falling caseloads, without making any corresponding efficiency savings to reflect their reduced workload.

As the graph below shows, despite the level of debtors seeking formal debt remedies over the last 9 years being on the decline, there has been no corresponding reduction in the AIB’s staffing levels, or costs overall to reflect this.

The irony of all this is, that many of the cases that will be impacted by these increases will be creditor petitions, where it is the creditors who makes the debtor bankrupt. These tend to be local authorities, who do so to try and recover unpaid council tax. The result will be less funds will be returned to these local authorities, who have suffered budget cuts imposed by the Scottish Government, whilst the AIB, a Government quango has been allowed to insulate itself from cuts by increasing fees on debtors, creditors and the personal insolvency industry.

Funding of Personal Insolvency

It is clearly time there was an open discussion about how personal insolvency in Scotland is funded and whether a policy of full cost recovery is sustainable, whilst the AIB make no cuts to their own staffing levels and costs.

Until there is such a discussion, there should be no further fee increases for the AIB authorised by the Scottish Parliament.

Already, it has been shown that as a result of the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014, the number of debtors applying for sequestration and the Debt Arrangement Scheme (DAS) has reduced (50% reduction in relation to DAS). Over the long term this will mean a reduction in fees recoverable by the AIB, which whilst they continue to pursue a policy of full cost recovery and no cuts to their own services, can only result in a greater short fall that will need to be met by future fee increases.

These fee increases will only result in remedies becoming less accessible by debtors and creditors and result in a further decline in numbers using the remedies.

At some point we must ask who is the intended beneficiaries of Scotland’s personal insolvency regime?

The Bankruptcy Fees (Scotland) Regulations 2017

The regulations were laid before Parliament on the 20th February 2017 and are a negative procedure instrument. The Lead Committee is the Economy, Jobs and Fair Work Committee. The report date for the instrument is the 27th March 2017.